CEE and Central Asian countries’ fates brighter, but overall recovery remains fragile

The EBRD is a highly respected financial institution and expert in the CEE and Central Asian countries, their economies and investment environments as it has been one of the largest direct single foreign strategic investors in the region, where it has committed several billions euros of its private financial resources as well as other significant amounts of foreign direct investments mobilized from external sources over the past decade. 

Specifically, Russia is one of the main focal points of the EBRD's investment activity in this region. For instance, the EBRD currently has a net business volume of over 11.2bln euros with an estimated total project value in excess of 34.7bln euros in Russia over the past ten years. Its stated priorities in the country include improving the country’s infrastructure, encouraging economic diversification, boosting competitiveness and entrepreneurship and promoting energy efficiency as well as engaging in key policy dialogs with the Russian government in efforts to help it improve the overall legal framework and investment environment on the domestic market.

General forecast overview

In a nutshell, the EBRD’s upgraded 2010 forecast, on the whole, is realistically optimistic about the region, though with some justified reservation on the expected recovery and its overall rates in some of the constituent countries. Thus, after an average contraction of region’s real GDP of about 6% last year, the EBRD now expects average growth of 3.3% for the region in 2010, compared to 2.5% it predicted in October 2009, and much higher growth of 3.8% in 2011. 

“The upward revision was driven by stronger than expected performance in four large economies in the region, namely, Poland, Turkey, Russia, and Kazakhstan, on the back of stronger commodity prices and a resumption of capital flows to emerging market countries.”

The upward revision, according to the EBRD, was driven by stronger than expected performance in four large economies in the region, namely, Poland, Turkey, Russia, and Kazakhstan, on the back of stronger commodity prices and a resumption of capital flows to large emerging market countries. In contrast, for most of the smaller countries that do not export commodities, the recovery will continue to be slow, and in some cases, such as in the Baltic countries and Hungary, the banks expects to see continued negative growth in 2010.

“The recovery in the region remains fragile, with large variations across countries. The gradual global recovery will support regional growth, but local factors will dampen it,” EBRD Chief Economist Erik Berglof said. “Appropriate public and private sector policies and actions to clean up balance sheets, restructure debt and deal with distressed assets will be important to help sustain credit growth and support economic recovery.”

With regard to financial institutions, the EBRD says that more cautious lending policies will become banks’ default modus operandi, as the recession has heightened risk perceptions, while rising non-performing loans still burdening the balance sheets will continue to hamper most banks' ability to provide the funding needed by the region to emerge from the crisis. Besides, the recovery in external demand is expected to be partly offset by the fiscal tightening required in many of the countries in this region. Private domestic demand will be constrained by rising unemployment and slow credit growth and unemployment will continue to rise as firms enhance productivity in an effort to rebuild buffers depleted during the crisis.

Regional recovery profiles

A more rosy future awaits the so-called huge commodity exporting nations, which are expected to benefit generously from the rebound in commodity prices suggested by the positive futures prices, with spillover effects on the neighboring region. Thus, Russia and Kazakhstan are expected to grow between 3.5% and 4% in 2010, while Azerbaijan by as much as 9%, driven to varying degrees by remaining spare capacity in the natural resource sector and continued support of domestic demand by fiscal policy. This will spill over into growth in the other economies of Central Asia that rely heavily on remittances from or exports to Russia and Kazakhstan. Growth in Central Asia will also be supported by stabilizing non-oil commodity prices and substantial government- or donor-funded investment. 

“However, economic recovery in the region remains fragile, with large variations across countries. The gradual global recovery will support regional growth, but local factors will dampen it.”

Eastern Europe and the Caucasus will likely grow faster, around 4 per cent on average. This is partly a rebound from a sharper decline in 2009, and partly a result of rapid growth forecast in Azerbaijan. Remittances from and exports to a recovering Russia will benefit the countries in the Caucasus and Belarus. Ukraine will likely begin to emerge from the deep contraction experienced in 2009 once the political situation settles after the presidential elections. 

On the other hand, a more subdued recovery and growth scenario is expected in Central Europe and the Baltic States, where the EBRD forecasts average growth of 1.4% in 2010. Broken down, growth in the Baltics and Hungary is expected to remain negative in 2010, despite a projected gradual bottoming out of the deep recession, while Poland, Slovakia and Slovenia are likely to fare much better, thanks to benefit from a rebound in eurozone growth, resulting from their deeper integration into the traditional Western European manufacturing production industry and the fact that they had entered into the crisis with more moderate domestic demand growth.

And, finally, Southeastern Europe will, on average, is expected to enjoy a growth scenario similar to that forecast for Central Europe and the Baltic States, but with significant heterogeneity. This is because parts of Southeastern European countries, namely, Macedonia and Serbia, are expected to benefit from a rebound in metals prices, and Turkey, which is expected to gain positively from capital inflows following its recent investment rating upgrade. On the other hand, the recovery in other countries, such as Romania and Bulgaria, is expected to be significantly slowed by the expected tightening in their fiscal policies.